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Is it Time to Load Up on Bank Stocks After the October Bloodbath?

The S&P/TSX Composite Index suffered its biggest drop in three years on October 24. The index plunged 376 points as the global stock market sell-off has worsened on concerns over the global economy.

Last week, I’d warned investors that the “quiet years” were over for stock markets in the developed world. A hawkish U.S. Federal Reserve has come under fire from President Donald Trump for sticking to its rate-tightening path. Here at home the Bank of Canada elected to pull the trigger on yet another rate hike on October 24, raising the benchmark to 1.75%. The central bank cited economic strength in the domestic and global economy, but cracks are quickly emerging.

As this sell-off worsens and more consumers are squeezed by higher interest rates, central banks in the developed world could find themselves in a difficult predicament. This is especially true in the United States. A turn away from higher interest rates could send the U.S. dollar reeling.

Canadian bank stocks have not been spared from the October bloodbath. Today we are going to look at three top bank stocks. Should investors pounce on these lower prices?

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock had dropped 7.5% month over month as of close on October 24. The late September and October plunge has put TD Bank stock into even territory in 2018 as of this writing. The first three quarters of earnings have been good at TD Bank, and higher interest rates have improved margins. It also boasts the largest U.S. footprint of any other Canadian bank, and its U.S. Retail banking segment has benefited from the gigantic tax-reform package pushed through by the Trump administration late last year.

Bank of Montreal (TSX:BMO)(NYSE:BMO) stock had dropped 7.9% over the past month as of close on October 24. This pushed shares into negative territory for 2018. BMO stock had gained considerable momentum since mid-April and in the first nine months of 2018, adjusted net income was up 6% to $4.45 billion. Like its peers, BMO has also benefited from improved margins due to higher interest rates. Adjusted profit in its U.S. Personal and Commercial Banking segment surged 34% year over year to $376 million in the third quarter.

Royal Bank of Canada (TSX:RY)(NYSE:RY) stock had plunged 9.3% month over month as of close on October 24. Shares were down 7.8% in 2018 as of this writing. Royal Bank has posted positive results in 2018 so far and remains one of the most robust financial institutions in the world. It is also the largest bank in Canada by total assets. In the first nine months of 2018, net income was up 6% to $9.18 billion and diluted earnings per share has climbed 9% to $6.16.

Are the banks buy-low opportunities right now?

The risks in the global economy at the current juncture should not be understated. The developed world is in a bind as it works to normalize monetary policy after years of historically low interest rates and quantitative easing. Meanwhile, the United States has ramped up its trade war against China and has also moved to aggressively renegotiate its trade position with key allies. These developments have the potential to significantly curb global growth into the next decade.

That aside, Canadian banks are still some of the most robust financial institutions in the world. Policymakers have managed to cool and stabilize one of the larger risks to the Canadian economy; the housing market. High consumer debt is still a concern, but recent surveys show that Canadians are adapting to the new reality and have adjusted spending habits.

Look for fourth-quarter earnings to give banks a boost in November and December. At current prices, aggressive investors with a long-term outlook should look to add some of the top banks during this pullback.

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Fool contributor Ambrose O'Callaghan owns shares of TORONTO-DOMINION BANK.

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